Mermaid Maritime - Lack Of Near-term Earnings Momentum

Expect earnings weakness in 1H18 as three key vessels will be dry-docked for maintenance and inspection.

Lack of clarity on US$19.7m investment into Cambodian land development company is a concern as it is not Mermaid’s core competency.

Maintain HOLD as weak earnings expected in 1H18.

Mermaid’s orderbook has declined q-o-q to c.US$148m as of 4Q17. With orderbook replenishment usually occurring in 3Q/4Q, we see risk of a further dip in orderbook in 1H18. Meanwhile, earnings are also expected to be weak in 1H18 as three of Mermaid’s key vessels will be dry-docked for scheduled maintenance and inspections.

Refinancing of the debt at associate Asia Offshore Drilling (AOD) remains an overhang, as discussions are still ongoing.

On the c.US$19.7m investment in land in Cambodia in December 2017, we see it as a net negative, owing to a lack of transparency around the transaction, and the lack of fit within Mermaid’s domain of expertise.

On the plus side, Mermaid has a healthy balance sheet and thus does not warrant the kind of distressed valuations seen in other O&M stocks.

Overall, we think Mermaid’s risk-reward trade-off is neutral at this point: the lacklustre near-term outlook and downside risks are offset by undemanding valuation levels (~0.4x P/BV) and lack of balance sheet stress. Thus, we maintain our HOLD call on the stock.

Where We Differ:

We note that Mermaid has impaired an above-average proportion of book value of its vessel fleet (c.30%), so P/BV ratios are more conservative.

Potential catalyst:

Contract awards on its key vessels could help Mermaid’s shares re-rate upwards.

Valuation

We base our valuation of Mermaid’s core subsea business (excluding stacked vessels) on a P/BV peg of 0.6x and ascribe zero value to associate AOD, giving us a Target Price of S$0.14.

Key Risks to Our View

Poor returns on the PTGC investment could adversely impact sentiment.

A lack of replenishment of the orderbook or deferment/cancellation of jobs would also bode poorly for the company.

WHAT’S NEW - 4Q17 numbers in line; expect weakness in 1H18

4Q17 profits in line.

PATMI of c.US$1.9m was in line with our estimates, as were gross profits of c.US$6.9m. On a full-year basis, lower workload was reflected in the revenue and profit numbers, with revenues of c.US$148m down 22% y-o-y, and PATMI down by 75% y-o-y to c.US$4.1m.

The decline in PATMI was also due to a steep decline in associate income from Asia Offshore Drilling (AOD) rigs which had its day rates rolled over to lower re-contracted amounts during 2016; thus 2017 was the first full-year of these rigs being on the lower rates.

Orderbook dips q-o-q to US$148m, could dip further in 1H18.

Mermaid’s orderbook as of 4Q17 stood at US$148m, down c.15% from 3Q17 as the company did not see any significant contract wins during the quarter.

Looking ahead, the first half of the year tends to be slower in terms of contract wins, as the orderbook has historically been replenished mainly in 3Q/4Q, in advance of the seasonally stronger April-October period owing to a lack of North-East Monsoon forces. Thus, it is possible that Mermaid’s orderbook continues to dip through 1H18.

Expect weakness in 1H18 on dry-docking of three key vessels.

Overall vessel utilisation was 39% in 4Q17, up from a weak 3Q17 (22% utilisation) but down y-o-y from 44% in 4Q16.

Mermaid’s four major vessels (Commander, Asiana, Endurer, Sapphire) had an average utilisation of 59%, which was also an increase q-o-q but down from the 72% seen in 4Q16.

Looking ahead, three of Mermaid’s key vessels are scheduled for dry-docking in 1H18 to undergo their 2.5-year intermediate/5-year special surveys, so we expect some weakness in terms of utilisation in the near term.

Regional outlook seems lacklustre; looking to find work in new areas.

Mermaid commented in its 4Q results that it is still seeing depressed vessel rates for its Dive Support Vessel and ROV Support Vessel market segments continuing throughout 2018 as new tonnage of high-specification vessels enter the market in 2018, forcing Mermaid to trade-down its vessels (and the associated day rates) to secure work.

The company is now looking to new geographical areas like the North Sea, West Africa and the Americas for work, as opposed to its traditional stronghold in the Asia-Pacific region.

Debt refinancing at associate AOD remains an overhang.

Although Seadrill has announced a global settlement with the majority of its creditors in relation to its restructuring plan as of February 2018, we note that the AOD entity (majorityowned by Seadrill, with Mermaid having a c.33.8% stake) has yet to have its debt refinancing finalised, as AOD is attempting to pursue refinancing without commencing Chapter 11 cases, which de-links it from Seadrill’s broader restructuring plan. Discussions between Mermaid, Seadrill and the bank lenders are still ongoing.

In a worst-case scenario wherein AOD fails to reach a refinancing agreement, Mermaid may see write-offs of its investment in AOD and loss of associate income if the three jackup rig contracts are terminated. Mermaid does not have contingent liabilities related to AOD.

We have been assigning zero value to AOD in our valuation, but negative news related to its debt refinancing may result in a hit to sentiment.

Lack of clarity on c.US$19.7m PTGC purchase is a negative to us.

Mermaid announced on 20 December 2017 that it had purchased a 49% stake in PTGC Co. Ltd (“PTGC”) from Mr. Leng Kheang. PTGC is an investment vehicle incorporated in Cambodia, whose primary asset is the ownership of land in Phnom Penh. It was stated that the property “has re-sale potential and residential and/or commercial development potential”, which suggests that the land should currently be undeveloped.

The rationale given was to put Mermaid’s cash on the balance sheet to better use, maintaining a “portfolio of suitable investments…while preserving its liquidity for business operations”.

Given the lack of transparency around the transaction, and the lack of fit within Mermaid’s domain of expertise, we see this as a net negative, as shareholders may question if the cash would be better off being returned to them.

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